The Importance of Liquidity in Commodity Markets
Liquidity is a concept that investors often overlook. In a standard brokerage account with a stock portfolio, liquidity isn’t really a factor. Stocks can be traded and sold at a moment’s notice so investors never really see the effect that a lack of liquidity can have on an investment portfolio.
Investors might remember what happened to the real estate market in late 2008 and the subsequent market crash that followed. Mortgages are illiquid investments that can’t easily be converted to another medium like stocks can. When the real estate bubble collapsed, investors were left holding properties valued at less than they owed on the mortgage and the lack of buyers meant many ended up in foreclosure.
The key to being successful in the commodities market is knowing what kind of liquidity differences come with each investment and how to avoid making costly mistakes.
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